BSE FMCG Index nears new high as falling input prices spark optimism

Rural demand another reason for buoyant sentiment towards FMCG stocks

The S&P BSE Fast Moving Consumer Goods (FMCG) Index — a gauge for the performance of consumer staple stocks — is nearing a new high as falling input prices and the past two years of underperformance have drawn investors to this sector.

The BSE FMCG Index on Thursday ended at 14,789 — only 4 per cent below its previous peak in October 2021. After BSE Auto, the sector is set to become only the second among BSE’s 19 sectoral indices to log fresh record highs.

A fall in the prices of palm oil — a key input for FMCG companies — triggered buying interest in FMCG stocks over the past few weeks. Sectoral rotation from high-beta stocks to more defensive plays has also provided traction.

“The oil price fall has been a big positive for the sector. That’s reflected in the performance of sector leader Hindustan Unilever. I don’t see any significant headwinds for the sector as raw material prices are coming down and the rural economy is likely to do well because of monsoons,” said G Chokkalingam, founder, Equinomics Research & Advisory.

In the past two years, the BSE FMCG index has underperformed the benchmark Nifty by a considerable margin. This was on the back of muted volume growth, partially due to weak rural demand. The increase in revenue and profitability at FMCG companies was largely driven by price increases. The underperformance has led to the sector’s price-to-earnings multiple falling to more reasonable levels.

“In an environment of slowing earnings revision momentum, we prefer sectors with strong earnings levers and margin of safety. In that context, FMCG stands out for its defensive nature and underperformance in the last rally,” said Elara Securities in a note.

On a year-to-date basis, the BSE FMCG Index is up 7 per cent, even as the Nifty has declined 7 per cent. However, over a two-year period, the former has gained 30 per cent and the latter is up 50 per cent.

The June quarter earnings and the accompanying management commentary could determine the future trajectory for FMCG stocks.

Consumer staple companies are forecast to post 20 per cent year-on-year (YoY) and 5 per cent quarter-on-quarter growth in sales and 27 per cent YoY and 4 per cent quarter-on-quarter growth in profits. Their operating margins are expected to remain around 24 per cent.

Analysts expect the benefits of falling raw material prices to accrue over the next two quarters.

“Raw materials started moving up a year ago. In the past few quarters, FMCG companies have also been able to increase their prices. Typically, there is a gap of a quarter or two before they can pass on the prices. Meanwhile, when margins were subdued, the stocks had corrected, even as the overall market performed well. With raw material prices now peaking, margins will expand as retail prices will not come down,” said Ambareesh Baliga, an independent analyst.

Optimism around rural demand on the back of a normal monsoon is another reason for the buoyant sentiment towards the FMCG pack.

“With expectations of a normal monsoon, there is optimism that rural demand will come back strong and margins will expand because of a fall in input costs.  As a result, there is renewed interest in FMCG stocks,” added Baliga.

Besides the fundamental factors, consumer stocks are also benefiting from a shift in investor preference to more defensive stocks amid market downturn.

“Even during the 2008-09 crisis, the FMCG Index fell only 5 per cent, even as the Sensex fell by more than 40 per cent and other sectoral indices between 30 per cent and 50 per cent. This time because of the rate hike and talk of recession, people have placed their bets on FMCG, based on past experience,” added Chokkalingam.